Dawn, here are all the rules for all cash accounts.  Whether this is a finding, is a question of materiality and how this is happening.  It does feel like a violation of the spirit, if not the actual rule of investments.

 

Les

 

 

Handbook 4370.2, Chapter 2-6

REGULAR OPERATING ACCOUNT

A. The Regular Operating account is a general operating account for the project which is used for depositing rental receipts and other receivables not specifically designated for the Security Deposits Account. The account also is used to pay operating expenses of general administration including mortgage payments, management fees, utilities and maintenance. The Regulatory Agreement states that the funds must be maintained in a separate account. However, * this paragraph suspends the operation and effect of this Regulatory Agreement provision by authorizing the management agent to hold funds in a centralized account, up to or exceeding $100,000, in institutions under the control of, and whose deposits are insured by, the Federal Deposit Insurance Corporation, National Credit Union Association, or other U. S. government insurance corporations under the following conditions:

 

Handbook 4370.2, Chapter 2-6

 

2-7. REPLACEMENT RESERVE

A. The Replacement Reserve account provides cash for the replacement

of capital items. Generally, those items are major capital

investments such as heating, ventilation, air conditioning, replumbing,

roofing, sprinkler systems, etc. The reserve is not

intended to pay for routine maintenance costs. The regulatory

agreement establishes the requirements for the Replacement Reserve

account.

B. The regulatory agreement states that the reserve must be maintained

in a separate account with the mortgagee or in a safe and

responsible depository designated by the mortgagee. Certain Section

8 projects are required to have replacement reserves invested in

interest bearing Federally insured securities or accounts.

C. The amount and frequency of deposits to the Replacement Reserve

account is regulated by the regulatory agreement. The reserve is

funded from two sources, a lump sum deposit made at the time of

loan closing and monthly deposits made as part of the monthly

mortgage payments.

 

Handbook 4350.1 Front page

This revised policy authorizes the mortgagee, after consultation with

the project owner, to invest funds in excess of $100,000 in U. S.

government-backed securities and to hold funds in excess of $100,000 in

institutions under the control of, and whose deposits are insured by,

the Federal Deposit Insurance Corporation, National Credit Union

Association, or other U. S. government insurance corporations under

certain conditions. Further, this revised policy 1) removes the list of

acceptable investment vehicles, 2) acknowledges and enforces the

provisions of the regulations, the Regulatory Agreement and Mortgagee’s

Certificate that state the Reserve for Replacement Funds shall be

established by and under the control of the mortgagee, and 3) places the

responsibility for determining the appropriate investment with the owner

and the mortgagee.

 

Handbook 4350.1, Chapter 4-2

Regulatory Agreements for projects generally contain the following typical language pertaining to the Reserve Fund for Replacements to the effect that owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of principal of the mortgage insured or held by the Federal Housing Commissioner of an amount equal to $_____ per month unless a different date or amount is approved in writing by the Commissioner. Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee.  Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project, for the cure of mortgage defaults, or for any other purpose, may be made only after receiving the consent in writing of the Commissioner. In the case of Section 202, 162, 801, or 811 projects, where HUD serves as the mortgagee, the project owner escrows the funds but may not withdraw them from the Reserve for Replacements Account without the Asset Management Branch Chief’s written permission. For HUD-Held mortgages, HUD shall exercise control over the Reserve Fund for Replacements by acting pursuant to its own authority as well as in the stead of the mortgagee. This authority may be exercised only by HUD Headquarters.

 

Handbook 4350.1, Chapter 4-20

4-20 Investment Requirements for Reserve for Replacement funds in Section 8 projects. Investment of the Reserve Funds in interest-bearing * accounts is required for certain projects receiving Section 8 assistance:

A. The revised Section 8 regulations apply to all owners of older Section 8 projects where the owners voluntarily opted to be bound thy those regulations.

B. Except for owners of previously HUD-owned projects sold pursuant to 24 CFR Section 886 (Subpart C), partially assisted projects, and Section 202/8 projects, the revised Section 8 regulations apply to projects for which:

1. Agreements to Enter Into Housing Assistance Payments Contracts (AHAPs) were executed on or after November 5, 1979, for New Construction projects.

2. AHAPS were executed on or after February 20, 1980, for Substantial Rehabilitation projects.

C. For these projects, earned interest is to remain in the Reserve Fund until its release is authorized by HUD.

 

Handbook 4350.1, Chapter 4-22

4-22 Investment of Reserve for Replacements Funds. Consistent with program * regulations and the Regulatory Agreement, the reserve for replacement funds must be maintained by the mortgagee. Investment options should be determined jointly by the mortgagor and mortgagee. The Regulatory Agreement requires, “.. such fund, whether in the form of a cash deposit, or invested in obligations of, or fully guaranteed by the United States of America, shall at all times be under the control of the mortgagee.”

A. This paragraph suspends this provision by authorizing the mortgagee to invest funds in excess of $100,000 in U. S. government-backed securities and to hold funds in excess of $100,000 in institutions under the control of, and whose deposits are insured by, the Federal Deposit Insurance Corporation, National Credit Union Association, or other U.S. government insurance corporations under the following conditions:

1. Mortgagees must determine that the institution has a rating consistent at all times with current minimally acceptable ratings as established and published by Government National Mortgage Association (GNMA).

2. Mortgagees must monitor the institution’s ratings no less than on a quarterly basis, and change institutions when necessary. The mortgagee must document the ratings of the institutions where the funds are deposited and maintain the documentation in the administrative record for three years, including the current year.

 

3. If the mortgagee does not perform the required quarterly review of the institutions where there are deposits in excess of $100,000 and does not maintain the funds in an institution with a rating consistent with current minimally acceptable ratings as established and published by GNMA, and the institution fails, the mortgagee is held responsible for replacing any lost funds. In addition, the mortgagee shall be subject to sanctions. In the event the mortgagee fails to replace the lost funds, HUD will seek all available remedies to recover whatever funds are lost as a result of the failed institution.

 

B. The above language is not deemed a modification of the Regulatory Agreement. Therefore, HUD reserves the right to invoke this Regulatory Agreement provision and make it operational in the future through notice or handbook change, if it is determined that such a policy is necessary or desirable.

 

Handbook 4350.1, Chapter 25-5

Holding and Investing Funds. The Residual Receipts of all projects with HUD-insured mortgages should be invested with interest accruing from the investments credited to the Residual Receipts account. Investments of Residual Receipts Account funds may be effected and are to be safeguarded by mortgagees and mortgagors in the manner described in Chapter 4 of this Handbook 4350.1. The procedures and sanctions described in Chapter 4 also pertain to the Residual Receipts Account. Reference also is made to HUD Handbook 4350.4, Insured Multifamily Mortgagee Servicing and Field Office Remote Monitoring Handbook, for additional information on this topic.

 

 

 

 

 

From: AHACPA Support <support@ahacpa.org>
Sent: Tuesday, February 5, 2019 5:04 PM
To: les@ahacpa.org
Subject: Operating Funds in Money Market Mutual Fund?